Audit Report on the Department of Housing Preservation and Development Engineering Audit Office’s Compliance with Comptroller’s Directive No. 7

The New York City Department of Housing Preservation and Development (HPD) is the largest municipal housing preservation and development agency in the nation.  Its mission is to promote the construction and preservation of affordable, high quality housing for low- and moderate-income families in thriving and diverse neighborhoods in every borough by enforcing housing quality standards, financing affordable housing development and preservation, and ensuring sound management of the City’s affordable housing stock.  Various HPD divisions further the agency’s mission by, among other things, contracting with private companies to manage capital construction projects, demolish unsafe structures, and make building repairs.  These activities are intended to resolve housing maintenance complaints, to maintain physical stability of existing affordable housing, and to preserve and create quality affordable housing.

Under the authority set forth in the New York City Charter, the New York City Comptroller has issued Comptroller’s Directive #7, Audit of Requests for Payment Received Under Contracts for Construction, Equipment, and Construction-Related Services.  This Directive requires that certain City agencies establish Engineering Audit Offices to conduct independent audits of payment requests for construction, equipment and related consultant service contracts, prior to those payments being processed in the City’s Financial Management System (FMS).   The Directive further provides directions on how such audits should be conducted.

Pursuant to Directive #7, HPD’s Engineering Audit Division (EAO) is supposed to, among other things, conduct reviews to ascertain the accuracy of payment amounts charged by contractors and vendors, including prices, quantities and calculations; perform field visits to physically verify work progress; and determine whether invoiced work has been completed in accordance with plans and specifications, and that the City has received appropriate value.   Based on the results of Directive #7 reviews, the EAO may request clarification and additional documentation, and approve, revise, or reject payment requests.

According to records maintained by HPD’s EAO, a total of 9,268 payment requisitions totaling $56.1 million, including payment requests for change orders, were audited by the EAO during Fiscal Years 2014 and 2015.

Audit Findings and Conclusions

The audit found that HPD’s EAO did not implement or follow appropriate procedures to ensure the EAO’s and HPD’s full compliance with Directive #7.  Specifically, we found that not all of the EAO’s payment request reviews were conducted in accordance with the requirements of Directive #7.  Further, we found deficiencies in HPD’s operations that undermined the EAO’s function.  In particular, we found that not all payment requests subject to Directive #7 were submitted to the EAO for the required reviews and approval before HPD paid the contractors.

As a result of those deficiencies in HPD’s procedures and in the operation of the EAO, we were unable to ascertain whether $9.6 million in sampled payments to contractors for demolition projects were justified.  Those sampled payments consist of $8.7 million in contract charges that HPD paid without documentation of a complete and adequate EAO review and nearly $900,000 in contract charges that HPD paid without any EAO review and approval at all.  Accordingly, while it is possible that the invoiced demolition work we sampled was completed, HPD’s files did not contain adequate documentation to verify that the amounts paid were appropriate.  In particular, even among the sampled payments that the EAO approved, most lacked evidence that the EAO performed required field audits and that its desk audits were adequate to justify the amounts paid.

Further, we found that in addition to the nearly $900,000 in 7 payment requests we identified in our sample as having been paid without submission to the EAO for review or approval, HPD failed to submit an additional 154 payment requests for demolition work to the EAO and, as a result, HPD paid an additional $2.3 million to contractors without any assurance by the EAO that the prices, quantities and calculations reported on the payment requests were accurate, that the contractors fulfilled their contractual obligations, and that the City received appropriate value for the payments requested.

In addition, we found discrepancies among the records maintained by HPD related to processing and payments for construction, demolition and repair work.  Overall, HPD’s records reflected that the agency processed 20,838 more payment requests for construction, demolition and repairs projects than were provided to the EAO for review.

All of the deficiencies we observed in our audit reflect weaknesses in HPD’s internal controls, which include: inadequate written policies and procedures for the EAO’s work; inconsistent records that ostensibly reflect the same transactions; fiscal procedures that fail to ensure that all payments subject to Directive #7 are reviewed and approved by the EAO; an impermissible reporting structure that compromises the EAO’s authority to serve as an independent check on HPD’s construction payments; and the absence of performance metrics or any equivalent system for agency management to track and assess the EAO’s performance, and the absence of any such metrics or system to ensure that HPD management is alerted to systemic contract-management weaknesses uncovered by the EAO’s reviews of payment requests.

Audit Recommendations

This report makes a total of 19 recommendations, including that HPD:

• Develop complete written EAO review policies and procedures that assure complete and consistent EAO recordkeeping and reviews in accordance with Directive #7;
• Ensure that the EAO conducts field visits to physically verify requested payment amounts and adequately documents the results of the field visits in accordance with Directive #7;
• Ensure that the EAO’s prevailing wage compliance procedures include all tests required by Directive #7, including but not limited to comparison of contractors’ daily sign-in sheets with other records specified in the directive, or alternatively, if the EAO relies on HPD’s Labor Monitoring Unit to obtain relevant information, that the Labor Monitoring Unit conducts all of the tests required by Directive #7;
• Ensure that the EAO maintains complete review records, including desk audit reports, field audit reports and other substantiating documentation;
• Ensure that payments are processed in accordance with the PPB’s prompt payment provisions;
• Develop and distribute written policies and procedures that clearly set forth processes across the agency to ensure compliance with Directive #7 and that reinforce the EAO’s role and authority;
• Ensure that all required payment requests are submitted to and reviewed by the EAO prior to any payments being made;
• Establish performance metrics for the operation of the EAO;
• Systematically track reasons for reductions and rejections, and monitor issues raised by the EAO that would help the agency improve its internal control environment as well as the EAO’s oversight function;
• Enforce HPD’s Standard Construction Contract Article 41 by requiring demolition and other contractors to submit bid breakdowns within 15 days of HPD directing them to proceed with contract work;
• Ensure that the EAO reports directly to the agency head or a deputy agency head as mandated by Directive #7. Establish an organizational structure that provides adequate authority to the EAO, supports the independence and integrity of the audit process, and provides a mechanism for improving internal controls; and
• Designate an alternate Engineering Audit Officer.

Agency Response

In its response, HPD disagreed with the vast majority of the findings and recommendations and stated that “[t]he audit report is flawed.  HPD’s demolition jobs are mostly emergency situations not specifically addressed in Directive No. 7. . . .  HPD’s Engineering Audit Office (EAO) is in compliance with Comptroller’s Directive No. 7 (Directive), which explicitly allows the EAO to utilize professional judgement in the development and execution of audit procedures depending on the nature of the work or project, the type of payment requested, and the state of work completion.  . . .  HPD’s EAO has developed a thorough and rigorous program of effective and efficient audit operations for HPD’s demolition and emergency repair work, which meets the goals of the Directive.”

This response from HPD evidences a fundamental misconstruction of both the meaning and intent of Directive #7, which is designed to ensure that the City receives appropriate value for construction, equipment and construction-related service contracts.  The Directive’s express expectation that EAOs will exercise professional judgment does not justify a departure from the specific controls set forth in the Directive absent a proper basis and the existence of compensating controls that ensure the furtherance of Directive #7’s goals.  As is expressly stated in Directive #7, the EAO is expected to “exercise professional judgment, consistent with the intent of these guidelines, to determine the nature and extent of the audit procedures necessary for evaluating the payment requests under review.”  (Emphasis added.)  In response to the audit, HPD failed to provide evidence of the EAO’s having engaged in such determinations or of how the intent of Directive #7 would be furthered by the alternative procedures that were being followed.  Accordingly, we do not accept HPD’s claim that the agency’s and the EAO’s failures to comply with Directive #7’s requirements were acceptable exercises of professional judgment.  While it is unquestioned that Directive #7 allows the EAO Director to use his professional judgement to determine the nature and extent of audit procedures, that flexibility cannot be used as an excuse for the pervasive undocumented disregard of procedures established by Directive #7.

HPD also stated in its response that “[i]n our view, the Audit Report is flawed because the auditors . . . rejected valid evidence from HPD showing that desk audits and field visits were conducted, [and] ignored evidence that photographs were stored electronically by job address, and failed to acknowledge that HPD’s LMU [Labor Monitoring Unit] handles all of the agency’s prevailing wage matters.”  However, as is discussed in detail below, the auditors carefully considered all of the evidence tendered by HPD of the reviews conducted, photos taken and the reviews conducted by the LMU.  In accordance with Generally Accepted Government Auditing Standards, we credited HPD fully for every piece of reliable information the agency provided.